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A Pedagogical Note on Risk Sharing Versus Instability in International Financial Integration: When Obstfeld Meets Stiglitz

Author

Listed:
  • Raouf Boucekkine

    (Aix-Marseille University (IMéRA and AMSE), and senior member of the Institut Universitaire de France)

  • Benteng Zou

    (University of Luxembourg)

Abstract

The pure risk sharing mechanism implies that financial liberalization is growth enhancing for all countries as the world portfolio shifts from safe low-yield capital to riskier high-yield capital. This result is typically obtained under the assumption that the volatilities for risky assets prevailing under autarky are not altered after liberalization. We relax this assumption within a simple two-country model of intertemporal portfolio choices. By doing so, we put together the risk sharing effect and a well-defined instability effect. We identify the conditions under which liberalization may cause a drop in growth. These conditions combine the typical threshold conditions outlined in the literature, which concern the deep characteristics of the economies, and size conditions on the instability effect induced by liberalization.

Suggested Citation

  • Raouf Boucekkine & Benteng Zou, 2019. "A Pedagogical Note on Risk Sharing Versus Instability in International Financial Integration: When Obstfeld Meets Stiglitz," Open Economies Review, Springer, vol. 30(1), pages 179-190, February.
    • Handle: RePEc:kap:openec:v:30:y:2019:i:1:d:10.1007_s11079-018-9514-z
    DOI: 10.1007/s11079-018-9514-z
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    More about this item

    Keywords

    Economic growth; Financial liberalization; Risk sharing; Volatility; Emerging markets;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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